New client has been in the food manufacturing business and averages about $80,000 in gross sales each year.
They keep excellent books, using the cash method.
Their prior preparer insisted they file under the accrual method "because they have inventory", so they have been filing as such.
The preparer would make an adjusting entry to add the accounts receivable to "other income" and also make an entry on Schedule M1.
And that's it.
Now I'm engaged to prepare the return and I have some concerns.
1) Shouldn't the previous year's receivables also be included in the adjustment (previous year's adjusted out, current year's adjusted in)? Note that this would create a very favorable deduction for them for 2019.
2) Do I need to suggest they keep their books in accrual instead of cash?
3) Should I file form 3115 and switch them to cash? Does this increase their audit risk?
But would switching eliminate their favorable deduction this year?